Many people have pointed out that stocks all become perfectly correlated in times of crisis. That’s not strictly true but correlations do increase dramatically. Over the past six months (August 4th, 2008 to January 30th, 2009) notice how correlations (for a portfolio containing a selection of the Dow components) have averaged 0.67 and volatility across the portfolio has been 3.1% for the daily return standard deviation.

BAC

GE

IBM

INTC

JNJ

KO

MCD

MMM

MRK

MSFT

PFE

PG

T

WMT

Return

StdDev

Bk Of America Cp

BAC

-95.8%

9.8%

Gen Electric Co

GE

0.63

-80.9%

4.8%

Intl Business Mac

IBM

0.66

0.68

-48.1%

3.0%

Intel Corporation

INTC

0.57

0.64

0.74

-66.9%

4.1%

Johnson And Johns

JNJ

0.50

0.58

0.67

0.69

-28.4%

2.5%

Coca Cola Co The

KO

0.39

0.45

0.56

0.66

0.72

-35.8%

2.8%

Mcdonalds Cp

MCD

0.54

0.62

0.66

0.66

0.69

0.66

-5.5%

2.7%

3 M Company

MMM

0.56

0.66

0.68

0.68

0.77

0.66

0.75

-39.3%

3.0%

Merck Co Inc

MRK

0.55

0.62

0.71

0.75

0.80

0.66

0.73

0.72

-23.6%

3.5%

Microsoft Corpora

MSFT

0.58

0.55

0.75

0.80

0.72

0.68

0.68

0.68

0.73

-54.0%

4.0%

Pfizer Inc

PFE

0.61

0.60

0.66

0.70

0.76

0.64

0.67

0.71

0.80

0.70

-37.5%

3.2%

Procter Gamble

PG

0.53

0.62

0.68

0.69

0.84

0.70

0.73

0.78

0.82

0.72

0.77

-30.1%

2.6%

At&T Inc.

T

0.60

0.57

0.72

0.72

0.77

0.64

0.69

0.69

0.79

0.75

0.75

0.76

-29.7%

3.6%

Wal Mart Stores

WMT

0.44

0.51

0.57

0.57

0.75

0.61

0.72

0.66

0.71

0.61

0.64

0.73

0.66

-34.4%

2.7%

Exxon Mobil Cp

XOM

0.49

0.56

0.71

0.72

0.81

0.64

0.71

0.72

0.78

0.76

0.76

0.78

0.81

0.67

1.9%

4.3%

Portfolio

-44.6%

3.1%

Historically, the same portfolio has exhibited correlations between the various components which have been considerably lower. In fact, over the past twenty years (February 2nd, 1989 to Jan 30th, 2009), correlations have averaged 0.32, approximately half the correlation we have seen recently. The standard deviation of the daily returns was only 1.1%